*4.1.1 Social lending*

*Banking and Finance*

funding operations.

the collection of funds.

**4. Funds collection methods**

consultation document, in fact, the 5% threshold had been confirmed, despite the difficulties (very) often encountered by the portals in meeting this requirement. Also driven by the sector operators, Consob has decided to introduce a reduced threshold at least for larger companies, for which a technical situation is available. In conclusion, the frequent regulatory interventions have constituted an element of instability for the sector and, therefore, a brake on the development of crowd-

Crowdfunding has had a great following in Italy and in the world as it manages to create a direct relationship between the author of the project and potential investors. The platform allows to give visibility to the borrower's project, thus facilitating

Most platforms can operate according to two very specific collection models. These can have a decisive influence on the success of entering the project on the portal because they provide completely distinct features and modus operandi.

all the sums of conferred money will be returned to the lenders.

offered or by the payment of the registration fee to the site [15].

There are different types of crowdfunding, both in terms of method and

In the literature, the "classic" models are: social lending (peer-to-peer lending), equity-based crowdfunding, reward-based crowdfunding, donation-based crowdfunding and royalty-based crowdfunding [9, 12, 16]. Four of these models (equity-based crowdfunding, reward-based crowdfunding, donation-based crowdfunding and social lending) have been codified—for the first time—in the 2012 Massolution Report [17]. In recent years, alongside these classic models, there have been new crowdfunding models that are civic, corporate and do-it-yourself. Invoice trading, real estate, recurring crowdfunding and energy crowdfunding have recently been added to them.

In this section, the classic models are illustrated. In particular, they are social lending (peer-to-peer lending), equity-based crowdfunding, reward-based crowd-

funding, donation-based crowdfunding and royalty-based crowdfunding.

The first model is represented by "all-or-nothing." Its application starts from the assumption that the borrower inserts a target in his project, or indicates the sum of money to be obtained within a given period of time. During this period of time, the platform does not make any financial transactions vis-à-vis the author of the project, despite payments from investors. This is due to the fact that the transfer of the collected money is conditional on the achievement of the target: in fact, from the beginning it is established that, in the event that the objective is not achieved,

On the contrary, the second collection model, called "keep-it-all" or "take-it-all" depending on the portals, provides the payment of the loans obtained regardless of whether or not the target is reached. Using this method, the proposer can periodically obtain payments from the platform or receive the credit at the end of the timing. Certainly the choice of "take-it-all" is preferred above all in cases where the sum of money determined upstream is very high or if the project is risky. To promote the use of this latter collection model, there is also the possibility of obtaining benefits if the target is exceeded; in this case, the model is called "all-and-more" or "everything and more." The incentives may consist, for example, in the exemption from the payment of the commissions withheld by the platform for the service

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purpose.

**4.1 Classic models**

Social lending is one of the most widespread and articulated forms of crowdfunding. It is a money loan also known as peer-to-peer lending (P2P). Unlike other collection methods, social lending involves the direct or indirect signing of a real debt contract with the persons who request financial resources that is the promoter of the crowdfunding project. Essentially, it is an alternative to a bank loan, with the difference that investors have direct credit toward their financed subjects, contrary to savers who deposit their money in a bank that will provide credit, having so a credit toward the bank.

Generally, social lending is preferred by families, non-profit associations, SMEs, which, when registering on the platform, provide all the information needed to establish their creditworthiness. In the social lending to each subject that requests a loan, a rating is assigned, based on the data present in the central risk (as in the normal credit market). To supplement this information, social media opinions are also generally considered, such as reviews of companies that are already started and that offer services. Only if the creditworthiness is valuated adequate, the financial request will be included in the platform. The lower the rating, the higher the interest rate is required based on the risk-return ratio. Therefore, the critical success factor of the platform is the ability to correctly estimate creditworthiness in order to minimize the risk of insolvency. In this regard, some portals have created protection funds in the event of non-compliance; this on the one hand expands the protection of investors, and on the other hand, it increases the costs for the financed subjects.

It is possible to opt for one of the following hypotheses:


In all the cases described therein, the typical risks of the active position of the obligatory report (credit, liquidity and interest rate risk) remain at the lender and this may compromise, in some occasions, the level of reliability of the platform. To remedy, for example, the hypothesis of an increase in liquidity risk, which would entail a significant loss of confidence by potential creditors, the possibility of transferring the contract in itinere is usually proposed, making use of secondary markets [7].

The investment on social lending platforms can take place—typically—in two ways. The first involves the subdivision of a single loan into shares (generally of the same value) that investors can purchase independently on the portals. The second mode, on the other hand, involves the presence of portals that create loan portfolios with the same risk-return ratio that can be purchased pro-rata. It is also possible that the money of the lenders is divided into several portfolios with the same risk-return ratio, so as to reduce—even more—the potential risk of insolvency. In addition to this, some platforms also offer the possibility of reselling their credits to third parties, so as to return more quickly than the investment, so creating a secondary market. It is customary to distinguish between two main business models for social lending: direct and widespread. The two types differ depending on the fact that investors decide, directly and independently, where to allocate their resources (direct model) or indirectly through the platform (common model).

Since the end of 2017, the use of social lending has begun to spread for the payment by installments on e-commerce sites. In Italy, aggregated data only for loans for natural persons are diffused and these loans vary from a minimum of € 250.00 to a maximum of € 40,000.00. A research by the Politecnico of Milan [18] found that access to this channel is generally more expensive than that in which credit institutions operate.

#### *4.1.2 Equity-based crowdfunding*

Equity-based crowdfunding is one of the tools most used by start-ups and SMEs, which, especially in the start-up phase of a business, find it difficult to access subsidized loans or government grants, although they have the required requirements. It assumes the role of equity-based when, as a consideration for the financing activity, the conferment of a participation title within a company is present. This type of crowdfunding guarantees the possibility of addressing to a more or less wide audience, thanks to which the initial feedback on their entrepreneurial activity can be seen from the initial phase. Furthermore, the only costs that the promoters will have to pay, using the platform, are mostly those linked to the commissions to be paid to the portal and to the cost of keeping the restricted current account. However, the start-up or the SME must operate in such a way as to create an intense flow of communication with the outside if it wants to reach a larger number of investors. It is possible, for example, by releasing interviews, publishing its objectives also on social media, participating or sponsoring some events of significant importance. This is still an extraordinary transaction concerning the collection of new risk capital, and therefore there are some repercussions on the level of patrimonial and administrative rights, because the company structure changes according to the number of interested investors.

As already highlighted, in Italy, Consob issued a regulation in 2013 in which the limits and obligations to be respected regarding the equity-based crowdfunding were indicated. In particular, Consob has set a maximum bid amount of 5,000,000 euros, which can only be collected through the use of the portals registered in the special section of the register of managers. Managers are obliged to provide all information regarding SMEs or start-ups registered in the portal, with a focus on individual offers, thus detailing the business plan, the curriculum vitae of the founding members and the risks associated with equity-based activities crowdfunding.

This is realized to reduce information asymmetries and to allow investors to make a rational and informed investment choice of their capital. Consob has also provided for a "conscious investment path" reserved for potential investors, thanks to which they can know the most difficult aspects linked to the activity of granting credit. Moreover, for non-professional lenders, the Regulation provides for the recognition of the right of withdrawal to be exercised even without the existence of

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*Crowdfunding: The Case of Italy*

*4.1.3 Reward-based crowdfunding*

*DOI: http://dx.doi.org/10.5772/intechopen.90940*

funding, which will be discussed below.

*4.1.4 Donation-based crowdfunding*

a particular reason and without the payment of penalties. However, this right can

With the term reward-based crowdfunding, a particular online fundraising method is outlined that envisages, on the one hand, the payment by the investor of a small amount of money, and on the other hand the payment by the taker of a reward. This reward can be various, but in general, it cannot include financial compensation. The borrower is therefore obliged to provide the service or to proceed with paying the reward, because, in the event of non-fulfillment of this promise, the project could lose credibility to the lenders; however, some platforms are used to frame the consideration of the subject as a real obligation to perform, from which the typical effects provided by the law arise. Over the years, reward-based crowdfunding has become widespread above all in the artistic field, in which the promoters of cultural and musical projects found the necessary funds for the realization of the projects, providing in exchange various benefits, such as free tickets, public

mentions during the events, preemptive fees for the purchase of tickets.

Over time, it has become a perfect substitute of equity because it allows to obtain liquidity without altering the corporate structure. At the same time, it has also become an alternative way to get answers from consumers on new projects to carry out: in this case, the form is defined pre-placement, most often linked to a pre-order operation with the goal to get feedback from potential customers even before the product is launched. Even some large multinationals like Nike and Coca-Cola have decided to use this tool, lightening the workload traditionally entrusted to marketing companies. This method is particularly preferred by start-ups of young people and by SMEs in the constitution phase, which wish to obtain information on the outlet market [15]. In Italy, the reward-based crowdfunding model is associated to three legal categories. The first is the pre-order that is an operation that the Civil Code defines as e-commerce, which concerns a future sale that is perfected with the realization of the good. The second, again on the basis of the Civil Code, is a modal donation (art. 793 c.c.) with which the donor requires the donor to perform an obligation to his advantage or for the benefit of third parties. The third type is the royalty crowd-

In the case of donation-based crowdfunding, those who decide to contribute financially to a campaign take on the role of real donors, due to the fact that the financing of the activity, regardless of the amount, is carried out in the form of good work. For this reason, most of the time no budget is foreseen and, in addition, there is often no return for the benefactor, who will find satisfaction only in having participated to the realization of a project whose main objective is a "good cause." Within this model, it is possible to distinguish two different sub-typologies according to the end pursued: some projects in fact concern private or personal spheres, while others are aimed to third parties without the purpose of profit. At the base, therefore, there is the will to support through a kind of online collection the realization of an objective that brings advantage to a part of a community, which can include not only subjects with particular social or economic problems, but also the inhabitants of a circumscribed one territorial area (e.g., public events). An example of donation-based crowdfunding, even for no humanitarian purposes, was recorded in the political sphere and, in particular, during the election period in the United States of America: on this occasion, a targeted campaign was promoted to the re-election of President Barack Obama [15].

only be exercised in the 7 days following the membership order.

a particular reason and without the payment of penalties. However, this right can only be exercised in the 7 days following the membership order.
